The U.S. economy has continued to grow despite tariffs, immigration restrictions, energy disruption, and persistent inflation, supported by business investment, productivity gains, domestic energy production, and flexible financing markets.
The difference is visible in the automotive industry. Volkswagen stopped vehicle production at its Transparent Factory in Dresden, Germany, late last year, while BMW continues to operate its largest global manufacturing plant in Spartanburg, South Carolina.
Companies Continue To Invest
Economists had expected tariffs and other supply pressures to weaken U.S. growth. Instead, the economy has continued expanding at an annualized rate of about 2%, while the feared combination of weak growth and persistent price increases has not fully developed.
Joe Brusuelas, chief economist at RSM, said the trade and immigration policies imposed by the Trump administration demonstrate the underlying strength of the economy. Faced with higher costs for foreign components, many U.S. companies invested rather than accepting lower profit margins.
Brusuelas said capital expenditure currently represents 13.9% of U.S. gross domestic product. He added that investment would normally be expected to slow under the current mix of supply and demand shocks, but it has remained strong.
Productivity growth has helped companies absorb some of those pressures. It has also supported continued economic expansion despite higher operating costs and uncertainty around global trade.
Domestic Energy Reduces Exposure
Higher oil prices caused by conflict in the Middle East would once have posed a greater threat to U.S. growth. The expansion of shale oil and gas production has reduced that exposure by making the country one of the world’s largest energy producers.
Brusuelas said oil’s contribution to each unit of U.S. GDP has fallen by half over the past 50 years. Fracking and alternative fuels have also reduced the economy’s dependence on imported petroleum.
Europe remains more exposed to external energy disruptions. Its reliance on long-term contracts and interconnected supply networks created problems when Russian gas supplies were cut following the invasion of Ukraine.
Financing Systems Reflect Different Approaches
Rebecca Christie, a senior fellow at Bruegel, said differences between the U.S. and Europe also reflect their attitudes toward risk. She described American businesses as more willing to accept short-term uncertainty for a possible long-term gain.
European companies depend more heavily on bank loans, while many workers’ pensions are tied to insurance contracts that limit both gains and losses. U.S. companies have greater access to stock markets, private investors, and venture capital.
Selling shares or raising venture funding can give companies more flexibility than relying only on bank financing. However, market-based systems can also expose businesses and investors to larger fluctuations.
Jobs Rise As Inflation Accelerates
The U.S. added 172,000 jobs in May, while the unemployment rate remained at 4.3%, according to the Bureau of Labor Statistics. Job growth came from leisure and hospitality, local government, and healthcare, while financial services employment declined.
Economic strength at the national level does not remove financial pressure on households. Christie said high inequality, rising living costs, limited job opportunities in some areas, and housing shortages continue to affect many people.
Consumer prices rose 4.2% in May compared with a year earlier, up from 3.8% in April. The Consumer Price Index increased 0.5% during the month, with gasoline and housing costs contributing to the rise.
Higher energy prices, inflation, and inequality remain risks to continued growth. Brusuelas described the U.S. as “the cleanest shirt in a very filthy laundry.”
Featured image credits: kalhh – pixabay.com
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